Simon Says: Can preemptive right stop any transfer of shares?
Published10/05/2017 by Simon Choi
This is the thirty-second in a weekly series of legal advice provided in a short and entertaining story format.
每周轻松有趣法律常識故事系列 - 第32篇
Keywords: Company Law, Preemptive Rights, Transfer of Shares
Can preemptive right stop any transfer of shares?
Jack, Dan and Com own DJ.com, one of the largest e-commerce corporation based in Beijing. Com owns 80% of the shares and is the legal representative, and Jack and Dan each own 10%. They are all directors of DJ.com.
Jill, a graduate from the Central Academy of Drama, is now a prominence Chinese actress. Both Jack and Com fell in love with her charm. Jill eventually chose Jack, because their names both started with a J and they are from the same province. They decided to marry each other, and Com, of course, was unhappy.
Whatever Jack proposed, Com refused in the capacity as legal representative. After 3 months, Jack decided to resign his directorship and to leave DJ.com, to avoid Com. Jack decided to sell his 10% of equity to Dan at 600 million Yuan, and he sent an email to Com and Dan to notify them. Of course, Dan was furious because that meant in seek of true love, he lose completely in this battle.
“I order you to stay in the company. I have preemptive rights and you shall not sell your shares to Dan.” A fuming Com said.
“You can buy my shares then, if you don’t want me to sell them to Dan. Otherwise, you have no right to stop me from selling my shares.” Jack said.
Does Com have any right to stop Jack from selling his shares?
Prof Simon Says:
No, in the absence of any articles of association of DJ.com provides the contrary intention, Com cannot use his preemptive rights to stop Jack from selling his shares to Dan as Dan is a shareholder of DJ.com too. A shareholder of a limited liability company, like DJ.com, may transfer all or part of his equity interests to another shareholder. Preemptive rights work against a third party only.
In general, preemptive rights allow shareholders of the company to buy shares before outsiders, in order to maintain stability in the company. In the case of a transfer of shares among shareholders, Com may not stop Jack from selling his shares to Dan.
China’s Company Law (2013)
Article 71 The shareholders of a limited liability company may transfer allor part of their equity interests among themselves.A shareholder proposing to transfer its equity interests to a non-shareholdershall obtain the consent of more than half of the othershareholders. The shareholder shall inform the other shareholders of theproposed equity transfer in writing and seek their consent. Failure toreply within 30 days from receipt of the written notice shall be deemed asconsent to the proposed transfer. Where more than half of the othershareholders do not consent to the proposed transfer, the nonconsentingshareholders shall acquire such equity interests, failing whichthey shall be deemed to have consented to the proposed transfer.
Where the shareholders consent to the proposed transfer, the othershareholders shall have pre-emptive right to acquire such equity interestson similar terms. Where two or more shareholders intend to exercisetheir pre-emptive rights, they shall negotiate and determine theacquisition ratio. Where the negotiation fails, the shareholders shallexercise their pre-emptive rights based on the ratio of capitalcontribution at the time of the proposed transfer.
Where there are provisions in the articles of association of the companyfor transfer of equity interests, such provisions shall prevail.
For more about this or to contact Professor Simon Choi at www.acmeardent.com, email@example.com, +86 13823677853 or by WeChat: simonhkchoi.
About the Author: Professor Simon Choi
Prof Simon Choi, solicitor and linguist, is an international lawyer, qualified to practise law in England & Wales and in Hong Kong, China. Simon graduated from law schools of the Peking University, the University of London and the University of Hong Kong respectively, with an in-depth knowledge of Chinese laws and common laws and with more than 20 years experience in China practice and international trade, investment, finance, merger & acquisition. He is an adjunct professor of laws at the Zhongnan University of Economics and Law. Simon is the founding partner of Acme Ardent and can be reached at firstname.lastname@example.org or +86 13823677853.
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